Economic & Market Update
The employment numbers released today show that people are getting back to work without steeply increased wage costs to employers. This is helping the market feel more comfortable with our economic recovery, stoking optimism without the sidecar fear that inflation is continuing its steep rise.
Wages are critical to the inflation picture. Once hourly and salary costs go up, they are very sticky and hard, or impossible, to reduce. But if employers can attract needed help, which is challenging when the available labor force is still dealing with a lack of child care, continued virus fears and generous unemployment stimulus, and do it without skyrocketing costs, everyone can succeed.
There are still 3.5 million fewer people in the workforce than in February 2020.
The stock market continued its climb with the S&P 500 and NASDAQ hitting new highs with the Dow Jones Industrial Average also higher after an uncertain start. All the good news continues to benefit growth sectors the most. Shares of technology, telecommunication and consumer discretionary companies fared best.
In other markets, Asia is off this week as investors are disappointed that there does not seem to be additional stimulus coming from the Chinese government.
European markets closed out the first half of the year up nearly 13%, based on the pan-European STOXX 600, as Europe works to shake off, and contain, additional COVID-19 infections.
Bitcoin fell 41% in the second quarter, completing the worst sell-off since dropping 43% at the end of 2018. Bitcoin and its cryptocurrency brethren remain stuck in a contentious debate over their relevance and necessity in a world still attached to government-backed currencies.
The very relevant 10-year U.S. Treasury yield has fallen since its March peak to 1.48%. Remember that when yields fall, prices rise. The turn has surprised many and signals that some investors are doubtful about how strong the economy will be in coming years.
Modern Day's Robin Hood
The English folklore stories about Robin Hood celebrate him as a thief who steals from the rich and gives to the poor, who struggle under the burden of onerous taxes. Robin Hood is never apprehended for long before he manages to escape.
The modern day Robinhood, the popular stock trading platform, has the same philosophy by offering "mom and pop" traders an easier and less expensive way to trade via its online trading platform and app. This Robinhood is not getting away though. This week the company was fined nearly $70 million by the Financial Industry Regulatory Agency, the largest penalty FINRA has ever issued to any brokerage trading firm. Robinhood was accused of providing customers with inaccurate and false information related to their balances and positions, failing to adequately update their technology, and not providing due diligence when approving customers for option trading. A part of the settlement is earmarked for restitution regarding damages and losses customers suffered because of outdated technology.
Alex Kearns' family will receive a portion of this settlement. Alex was a customer of Robinhood and trading on the platform when his account stated he had a negative balance of $750,000. He was unable to reach client services to discuss his account and later committed suicide thinking he had financially ruined his family. He was 20 years old.
This is not the first fine the company has been issued. In 2020 the company was fined $65 million from the Securities Exchange Commission for not properly explaining how the firm generates revenue. A smaller fine was assessed by FINRA in 2019 for not routing client trades properly to get the best price. The company has stated they are making improvements in all these categories in order to be more compliant and better serve their customers. The waters may still be a bit rough though as Robinhood faces regulatory issues and potential civil suits from halting trading in popular traded companies like GameStop and AMC during the short squeeze phenomenon in January of this year. Robinhood is still young and seems content on moving forward.
Robinhood launched in 2015 and has experienced a substantial amount of growth since then. The trading platform is attractive to the millennial generation and those with a bigger appetite for option trading risk. The company currently has 17.7 million traders and is popular with Reddit members who mention it frequently on the sub-Reddit group ”Wall Street Bets”. Even as the company faces off with regulators in the U.S., they are expanding their services overseas. Robinhood also announced yesterday that they will be filing to go public through an IPO under the ticker symbol HOOD. This may be well timed positive information to detract from the recent fine, but the company is clearly making an impact in the online trading business.
Red Hot Housing
Much like the car sales trend in which previously owned vehicles are currently selling for nearly as much as new cars, the “used“ home market is also on fire. Prices are rising steeply on existing houses at the same time that builders are building new ones as fast as they can.
This is indeed the ideal sellers market. Prices are up nearly 24% year-over-year and the average price for a home in America has hit a high of $350,000. This is not just a U.S. phenomena, either. Australian prices rose by the most in over 15 years, up 14%. In Canada prices were up 16% in just the last three months of 2020. Nothing beats New Zealand where prices rose 21% in a year. The median home in Auckland, the country's largest city, is $790,000 in U.S. dollars. Over a year into the pandemic, countries across the globe are experiencing the same increase in home prices.
The reasons for the U.S. housing boom mirror to some extent the global housing market situation. There is the social aspect. Apartment dwellers want to get out of cramped quarters. Families, especially those leaning into the work-from-home movement want larger dwellings. The housing shortage that came in the wake of the housing crash of 2007-2009 is still very real. Also, people around the world spent less while quarantined at the same time that governments were generous with benefits and pandemic stimulus, so have more to spend on a home.
The Federal Reserve has done its part to support and boost our housing market. By keeping interest rates low and buying $40 billion in mortgage-backed securities every month, the Fed is providing ample liquidity to Fannie Mae, Freddie Mac and Ginnie Mae. However, there is a weary eye on this situation as the economic boom continues and the Fed considers removing its heavy-handed assistance by ending the securities purchases. Whether this will throw cold water on the market is debated by economists, who argue over whether the hot housing market needs, or is really benefiting, from the help. No one will have to wait too much longer to see what happens. It is expected that the Fed will begin to "taper" its bond purchases soon, and long before it raises interest rates. In the meantime, May home sales in the U.S. were more often than not contracted over their asking price following intense bidding wars. Buyers are being stretched, much like they were 15 years ago. Only half of buyers in May who used mortgages put at least the standard 20% down. “Affordability is worsening,” said Mark Fleming, chief economist at First American Financial Corp, and he believes this will eventually hamper any further price increases.
Raise A Glass
As we celebrate our nation's birthday this weekend, many will be raising a glass of beer, wine or spirits. Your beverage is about to get just a drop more expensive due to the seemingly endless conundrum of supply constraints in our pandemic-recovery.
For now producers are absorbing the costs. Higher expenses have hit just about every aspect of the market. Aluminum for beer cans is higher; glass is more expensive; labels and cardboard for shipping and containers are pricier. Then there is labor, which is going up as brewers seek elusive employees. Transportation, in which companies must compete with every other business, is also higher than it was pre-pandemic.
While the alcohol industry debates over whether the costs are transitory and will come down as the world finds its rhythm again, enjoy that drink and maybe stock up for tomorrow. Eventually one of the producers could blink and raise prices, causing everyone else to, also.
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